German city house prices soar 13.7% in 2017, average 6.9% nationwide - vdp

House prices in Germany's seven largest cities accelerated last year to a rate of 13.7%, easily beating the average 6.9% nationwide, says the Pfandbrief bank association. Median commercial property prices rose by 6.5%yy, outpacing 2016's 5.8%.

In the Top-7 cities - Hamburg, Berlin, Frankfurt, Munich, Dusseldorf, Cologne and Stuttgart - the residential price index of the Association of German Pfandbrief Banks (vdp, Verein deutscher Pfandbriefbanken), measured quarterly for the first time last year, climbed almost twice as sharply as the national average, the Berlin-based group said in a release. Apartment buildings were the main driver, showing an increase of 14.2% over 2016.

Nationwide, residential property prices in fourth quarter were up 8.3% against 4Q16, when they were rising at 6.2%yy. By contrast average commercial property prices of 7.0% were outpaced by the 7.5%yy rate, vdp figures showed.

"Increased construction activity shows that the market is functioning at base, but it is still lagging demand so that prices are continuing to rise," vdp said. New building will therefore at best contribute only gradually to moderating price rises, especially in the main urban centres.

Jens Tolckmitt, vdp managing director, commented: "It is open at present as to how the announced housing policy measures in the coalition agreement will impact price developments in housing markets. Initiatives that act on the supply side, in other words create more new building, should contribute to some relief to the market and thus price moderation." But he added: "What will be decisive for urban housing provision in the Top-7 cities will be particularly multi-family housing and the availability of construction land for this. Measures such as the child construction credit which provide incentives on the demand side are likely, on the other hand, to contribute to further price increases."

In commercial property, the market benefited again in 2017 from a robust economy and rising employment, vdp said, and its price index rose in 2017 by 6.5% over the previous year. Developments were dominated by office real estate (8.4%yy). Here, demand remained high while supply of new space was further limited by low construction activity. As a result, office rents rose by 3.2% over the year. At the same time, office property was repeatedly in focus of domestic as well as foreign investors. This again put pressure on yields, which slipped to around an average 4.9%.

In retail property prices climbed, albeit to a much lesser extent (2.9%) than for offices. The already changing behaviour of its increasingly online-affine customers is increasingly noticeable in stationary retail, vdp noted. Rents rose by just 1.3%yy on average, albeit above the 0.7% in 2016.